The Fed's $400bn Operation Twist failed to impress investors, who continued to sell companies in every sector. Photograph: Justin Lane/EPA

The US stock market collapsed on Thursday as fears of a second recession worried investors and Europe's woes wiped billions off stock markets around the world.

Wednesday saw the start of the massive sell-off after the US Federal Reserve warned of "significant downside risks" to the American economy. A $400bn bond-buying programme aimed at stimulating the moribund US economy failed to impress investors who continued to sell companies in every sector.

The fall continued as the release of figures showing a contraction in China's manufacturing sector for a third straight month helped drive down oil prices.

Gold, copper and other commodities also fell on fears that the global economy is heading in to another slowdown. The dollar soared against the pound, euro and other currencies, as investors bet the US currency was the safest place for their money.

In Washington, World Bank president Robert Zoellick said the global economy was in a "danger zone". Speaking at the beginning of the World Bank and International Monetary Fund annual meetings, Zoellick said: "In 2008 many people said they did not see the turbulence coming. Leaders have no such excuse now. Dangerous times call for courageous people."

Zoellick said that the chances of a double-dip recession remained unlikely. "But my confidence in that belief is being eroded daily by the steady drip of difficult economic news."

He said governments in the US, Europe and Japan had to act or the crisis would spread around the world. "Not to do so is irresponsible," he said.

The Dow Jones industrial average closed down 381 points, or 3.5%, to 10733.83. On Wednesday it dropped 284 points. The Standard & Poor's 500-stock index lost 37.20 points, or 3.2%, to 1129.56, and the technology-orientated Nasdaq Composite slumped 82.52, or 3.2%, to 2455.67.

Jamie Farmer, executive director of Dow Jones Indexes, said: "What we are seeing is the continued prevalence of anxiety in all the markets." He said the Fed's comments and China's slowdown had made nervous investor even more anxious. "Judging from people I have spoken to, volatility is the new normal. This may be what we are in for for the foreseeable future," he said.

During a nervy and dramatic day's trading in London, the FTSE 100 index tumbled 246 points, or 4.67%, to close at 5041. This is the blue-chip index's worst daily fall in percentage terms since March 2009, and its biggest points fall since November 2008 in the aftermath of the collapse of Lehman Brothers.

Markets across Europe shared the gloom, with the German Dax losing 4.9% and France's Cac falling by 5.2%.

Giles Watts, head of equities at City Index, said the sell-off was driven by "the sheer weight of evidence pointing towards a sharp slowdown in global activity", making a new recession more likely.

"All of the negative news has just culminated into a scenario whereby investors are asking themselves whether they really should be putting their money in risky stocks or defensive safe havens. Today's markets show the answer has firmly been the latter of those two options," he said.

Louise Cooper, markets analyst at BGC Partners, said traders were deeply fearful about the prospects for the world economy.

She said: "The future is so uncertain – the world could look significantly different in a month's time. Greece could have defaulted, we could be in the middle of a banking crisis – a bank could have even gone bust."